You may detect a sceptical tone there, but the question is real: does it matter if something unexpected occurs in the world of credit and rates?
We’ve been on this point for a while — assessment of risk is sticky, until it’s not — but were struck by a recent conversation with a market maker about his clients:
Everyone is acting like an LTCM.
From a tame taper to a rate rage? And on its birthday too.
As Alan Beattie says, it was a year ago this week that the “taper tantrum” shook emerging markets, after comments from Ben Bernanke raised fears of the Fed tightening monetary policy. That sucked for EMs even if the reaction to the actual taper, which began in December, was much more chilled.
But it’s what happens when rates eventually rise that’s perhaps more interesting now. From Lombard Street’s Dario Perkins (our emphasis): Read more
So, dear sceptic, you think that interest rates will go higher. Prices for debt will fall, meaning a wonderful opportunity to bet on what must occur. Easy.
Except it turns out that trading a bear market in bonds is hard. By way of example, BofA Merrill Lynch offer up the last rate tightening cycle that began on June 30, 2004. Imagine you decided to go short exactly a year beforehand.
During that period, 10y Treasury yields rose 117 basis points. However, once adjusted for negative carry and roll-down, an investor would have made only about 70bp, assuming a short position in 10y Treasuries was established on June 30, 2003 and held it for the next year.
Rainbows are always just over the horizon, the recovery is around the corner, and interest rate hikes are always two years away.
That timescale tends toward the far enough that we won’t start to discount it just yet, but close enough that we can claim to be anticipating it. (Who cares what happens in three years time, anyway?) Read more
So just how fast will the the Bank of England raise interest rates? For clues and pointers on its latest thinking now that employment has rapidly approached the thresholds (markers, thumb rules?) of forward guidance , the Inflation Report is out. Click to get straight to it:
Starting today we get what is basically the first formal step to a fully fledged market based deposit rate system from China (honourable mention of course to those more informal weapons of mass ponzi). It’s been coming and the move doesn’t effect corporates or individuals, but in the context of the Shibor spike, deposit pressure and the post-plenum reform blush it’s very worth noting.
From UBS’s Wang Tao:
[The PBOC] took the long-expected step toward liberalizing deposit rate on December 8, announcing that effective from December 9, depository financial institutions (banks) are allowed to issue large-denomination negotiable certificates of deposit, i.e., the so-called interbank CDs.
Word reaches us that the Credit Suisse axe will swing on Wednesday, with 50 heads to roll in the rates division as it bears the greatest brunt of cuts to fixed income, credit and commodities trading.
The Swiss bank has followed the lead of UBS in deciding that core fixed income trading is just too expensive, now that the whole flight to safety trade is over and lucrative over the counter business is dwindling. Read more
Something has been nagging at us this month — why were there so few market nerves apparent ahead of the possibility of a US government default, if the debt ceiling wasn’t lifted?
Not because we have any fresh insight into the chances of a political-cum-financial crisis in the US, but for what it says about a concept we think may describe much of the current situation in markets: sticky risk. Read more
They are billed as a quick and easy way for investors to gain access to higher-yielding assets while still providing some protection if interest rates start to rise. They are ETFs which track portfolios of (floating-rate) bank loans.
And they are on fire. Read more
The fixed income team at Credit Suisse have a good note talking about what’s really driving WTI backwardation. Small hint, they don’t think it’s much to do with Egypt.
They put the backwardation down to three things. Read more
The Reserve Bank of Australia’s deputy governor has been speaking on Thursday. Sadly there were no jokes but Philip Lowe did attempt to explain his boss’s side-splitting gag.
RTRS – RESERVE BANK OF AUSTRALIA DEPUTY GOV LOWE SAYS BOARD DID DELIBERATE FOR VERY LONG TIME, BUT ALWAYS DOES Read more
Lots of commentary is linking the mini-surge in WTI overnight, and subsequent WTI-Brent compression, to events in Egypt.
But it’s probably much more related to a shift in interest-rate expectations than anything to do with Middle Eastern tensions. Read more
That’s the new black according to Citi’s Steven Englander:
Since May 1 the median increase in 10-year local bond yields in 47 major EM and developed markets (DM) is 39bps (Figure 1). Among major EM economies (light blue) it is 83bps; among major DM (dark blue) economies it is 29bps. The US 10-year Treasury yield increase (red) is only at the median of developed economies and well below the overall median. In both EM and developed economies, the fat tail of rate increases is to the upside, so average increases are even higher. The paradox is that the run-up in US interest rates, which is arguably the primary driver of these global rate increases, is well below the average and median globally.
FT Alphaville was cordially invited to talk about the collateralisation of commodities at two separate conferences this past month. We thank IHS Global and the Association des Economiste Quebcois for the opportunity.
The crux of our argument was that you can’t really understand what’s going on in commodity markets unless you appreciate that commodities are no longer a pure consumption-based market. Read more
The disconnect we’ve noticed between commodity fundamentals and forward rates appears to be popping up in other asset classes as well.
Priya Misra, rates strategist at Bank of America Merrill Lynch, makes a very interesting point on Friday about what she sees in her sector. Read more
So Glenn Stevens likes the nags after all.
Well, sort of.
For the first time since he took the helm of the RBA in 2006, the governor did not tinker with interest rates on Melbourne Cup day (a public holiday across parts of the country). Read more
Buried in Morgan Stanley’s decent third-quarter results (excluding the absurdity that is DVA of course) is this intriguing footnote:
Morgan Stanley’s average trading Value-at-Risk (VaR) measured at the 95% confidence level was $63 million compared with $76 million in second quarter of 2012 and $99 million in the third quarter of the prior year. The Firm modified its VaR model this quarter to make it more responsive to recent market conditions.
While interest rates are likely to stay low for some time yet, they can’t be that way forever. When rates finally go up, banks could be in a position to profit — provided their balance sheets are ready.
An investor could attempt to research which banks will be best placed for such a shift. For retail banks in particular, since their business models are not as diverse as investment banks, a handy disclosure to look for in financial statements would be net interest income sensitivity. Read more
(That’s Lisa, at Thursday’s European Central Bank press conference) Read more
Every now and then, The New York Times takes a big ol’ swipe at derivatives for being evil and whatnot. That’s fine and well — and sometimes obligatory, particularly when it comes to certain structured products for which it’s hard to discern the benefit to anyone outside of a bank.
But it can all go awry when someone starts arguing against derivatives and just gets it wrong. It makes us do a sad, frowny face
and then get incredibly frustrated. Read more
Iceland, of course. Kitchen-sinked and cleaned-up, the Icelandic central bank has just decided to push up rates by 25 basis points to combat signs of inflation amidst “robust” domestic demand.
Statement: Read more
Real rates, to cut a long story short. Treasuries should be returning to trade inversely to equities, although stocks didn’t soar on the two days this week that bonds have slumped.
While eurozone sovereign debt did improve. Read more
Interesting exchange in the latest minutes of the TBAC – Treasury Borrowing Advisory Committee, which brings together primary dealers and US Treasury officials… (Hat-tip Bondscoop)
The question was asked if it made sense for Treasury to permit bids and awards at negative interest rates in marketable Treasury bill auctions. DAS Rutherford [Matthew Rutherford, Deputy Assistant Secretary for Federal Finance] noted that there were operational issues associated with such a rule change, but that the hurdles were not insurmountable. It was the unanimous view of the committee that Treasury should modify auction regulations to permit negative rate bidding and awards in Treasury bill auctions as soon as feasible. Rutherford noted that any decision on this policy change would likely be made at the May refunding. Read more
The obvious place to start when discussing the impact of Wednesday’s FOMC meeting on US banks is with the downward pressure on net interest margins that will result from the extended period of low rates.
A short, helpful note from Nomura’s Brian Foran breaks down the issue into various components, and we’ll present each in order. Read more
The below is from the FT’s Money Supply blog that covers all things central banky.
So the Federal Reserve on Wednesday will publish forecasts which will show us how long it plans to keep rates at more-or-less zero. Hasn’t it done that already? Read more
Brazil’s central bank has cut interest rates for the fourth time running as the government seeks to revive an economy that stalled in the second half of last year, says the FT. The 50-basis point cut in the central bank’s benchmark Selic rate to 10.5 per cent comes as Brazil’s development bank, which has a balance sheet four times the size of that of the World Bank, announced a reduction in lending last year in a move that should also aid efforts to ease rates. “The monetary policy committee understands that to mitigate in a timely way the effects coming from a more restrictive global environment, a moderate adjustment in interest rates is consistent with the convergence of inflation to the target in 2012,” the central bank said. The central bank abruptly ended a tightening cycle in August after Latin America’s largest economy began slowing on the back of tighter monetary and fiscal conditions, the negative impact of a strong currency on manufacturing and the eurozone crisis.
The Federal Reserve board will put the finishing touches to a new plan for communicating its strategy to the public at its December meeting, ahead of unveiling the plan early next year, the WSJ reports. To make its stance on interest rates clearer, the Fed could divulge more of its forecasts for growth, employment and inflation each quarter. Fed officials have already sought to guide markets away from expecting a rate increase before “mid-2013″. The new communications regime may also see a formal declaration of the Fed’s informal 2 per cent inflation target, accompanied by a description of its goals with regard to the unemployment rate.
And so it begins. The softening up exercise for another splurge of QE.
From the Bank of England’s depressing November inflation report. Read more
There’s something for everyone in the Chinese PMIs for October:
BEIJING, Nov. 1 (Xinhua) — China’s Purchasing Managers’ Index (PMI) dropped to 50.4 percent in October after rising for two consecutive months, down 0.8 percentage points from September, the China Federation of Logistics and Purchasing (CFLP) said Tuesday. Read more
The Reserve Bank of Australia cut its main cash rate by 25 basis points to 4.5 per cent on Tuesday, Reuters reports, as it reacted to benign inflation figures at home and threats to the global economy. The highest interest rates in the developed world have shrunk business credit and sent mortgage growth to its lowest level since 1977. Government data on Tuesday showed Australian house prices fell by the most in almost three years last quarter while sales of new homes were the lowest in a decade in September.